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Reference Case No. 2 of 1949, decided on 16th March 1950.

Income-tax Act (XI of 1922)

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----Ss. 22 (2), 23 (2), 23 (4) & 66 --Filling of return without Profit and Loss account-Whether "no return"-Whether notice under section 23 (2) in such case necessary-Powers of High Court; only advisory and confined to considering and answering the actual question referred.

Notice under section 22 (2) was issued requiring the assessee to file return of his income by certain specified date. Before the return was filed the Income-tax Officer issued another notice under section 22 (4) for production of the accounts by a certain date. The assessee filed the return but it was not accompanied by copies of profit and loss account and the balance sheet. By a letter the income tax Officer pointed out this omission to the assessee but no step was taken by him (assessee) to rectify it. Adjournments for production of the accounts were allowed from time to time but after giving a last warning further adjournment was refused and the Income-tax Officer made a best judgment assessment under section 23 (4). The Income-tax Officer, how ever, did not issue any notice under section 23 (2) during the assessment proceedings.

On appeal the Appellate Assistant Commissioner upheld the assessment. Before the Tribunal the assessee took the stand that the assessment was illegal because (i) the return filed under section 22 (2) was valid, and (ii) non-issue of notice under section 23 (2) constituted "sufficient cause" preventing the assessee from producing the accounts called for under section 22 (4). The Tribunal upheld the assessment holding that the return filed being invalid the best judgment assessment was correctly made.

Held: where a return of income filed by an assessee substantially complied with the requirements of Rule 19 of the Income-tax Rules, 1922, but it was not accompanied by copies of profit and loss account and balance sheet, it could not be said that the return was no return in the eye of law. The Income-tax Officer in such a case should issue a notice under section 23 (2) giving an opportunity to the assessee to complete the return. If no notice under section 23 (2) was issued he would not be justified in making assessment under section 23 (4) on the ground that the assessee had failed to make a return.

Under section 23 (4) failure to comply with all the terms of a notice under section 22 (4) is an independent default and the Income-tax Officer was entitled to make an assessment under section 23 (4) for default of notice under section 22 (4).

The function of the High Court in cases referred to it is advisory and is confined to considering and answering the actual question referred to it. Unless and until a question is duly referred to it, under the provisions of section 66, the High Court is not competent to raise any question of its own accord.

[Case-law referred to.]

A. K. Fazlul Haq and Shamsuddin Ahmad for the Assessee.

Radhika Ranjan Guha for the Commissioner.

AMIRUDDIN AHMAD, J.

-This is a reference by the Income-tax Tribunal under section 66 (1) of the Income-tax Act, and our opinion has been asked on two questions, namely,-

(1) Whether, in view of the fact that the return filed by the assessee was not accompanied by copies of profit and loss account and balance-sheet, there was non-compliance with the terms of the notice under section 22 (2) so as to justify an assessment under section 23 (4)

(2) Whether, in the circumstances of the case, when the Income-tax Officer, without issuing a notice under section 23 (2), issued a notice under section 22 (4) and the assessee failed to comply with the terms of such notice there can be said to be a default under section 22 (4) so as to justify an assessment under section 23 (4)

Besides the two points referred to us by the Tribunal, the assessee in his application had asked the Tribunal to refer a third question, namely, whether non-issue of notice under section 23 (2) constituted "sufficient cause" preventing him from complying with the terms of the notice under section 22 (4).

The facts of the case on which our opinion is sought are as follows : The assessee Gopinath Biswambar Roy was asked by a notice under section 22 (2) of the Income-tax Act to furnish a return of his income of the previous year by the 23rd October, 1944, for the purpose of assessment of Income-tax for the year 1944-45. The assessee asked for extension of time on several occasions which was granted and he was asked by a reminder ultimately to submit his return by 24th February, 1945. On the 20th March, 1945, however, the assessee filed a return which was not accompanied by copies of profit and loss account and balance -sheet. There does not appear to be any other defect in the return. By a letter dated 19th June, 1945, the Income-tax Officer drew the assessee's attention to the omission but no steps were taken by the assessee to rectify it. Before the issue of this letter, however, the Income-tax Officer had served the assessee with a notice under section 22 (4) of the Act requiring him to produce his account books of the previous year and fixing 31st March 1945, for the purpose. This notice appears to have been issued before the submission of the return by the assessee, as on the date on which he submitted the return, namely, 20th March, 1945, the assessee applied for an extension of time for production of account books. On the 31st March 1945, he made another application repeating the prayer for time to produce his account books which were stated to have been in Calcutta in connection with a matter with the Civil Supply Department. The Income-tax Officer extended the time upto 25th June, 1945 asking him to produce such books of account as were available and to adduce evidence in support of the allegation and some books were at Calcutta. This direction was not complied with by the assessee who on 23rd June 1945, again applied for a further six months' time on the plea that his accountant had left his service and that it would take some time to appoint another man in order to complete and produce the accounts. The Income-tax Officer refused to grant any further adjournment and made an assessment to the best of his judgment under section 23 (4) of the Income-tax Act on the 30th June 1945. At no stage of these proceedings the Income-tax Officer issued any notice under section 23 (2) of the Act. The assessee then made an application under section 27 of the Act for re-opening the assessment which was refused by, the Income-tax Officer and the assessment was upheld on appeal by the Appellate Assistant Commissioner by his order, dated 27th February, 1946. Against that decision, the assessee preferred an appeal to the Tribunal and the objections taken before the Tribunal were that there was no default under section 22 (2) since a valid return had been filed and that the point of failure to comply with the terms of the notice under section 22 (4) did not legally arise when the assess ment itself was illegal for want of notice under section 23 (2), and it was further urged before the Tribunal that non-issue of notice under section 23 (2) constituted "sufficient cause" preventing the assessee from producing the accounts called for under section 22 (4). The Tribunal by its order, dated 31st January 1948, held that the assessee having filed an invalid return, it must be taken that there was no return in the eye of the law justifying the Income-tax Officer in making an assessment to the best of his judgment and the Tribunal also found the other points against the assessee. The assessee then made an application under section 66 (1) of the Act for a reference to this Court on the three questions which we have stated above, but the Tribunal has referred only two questions for our opinion by its order, dated 18th December 1948.

Mr. Fazlul Haq who has appeared for the assessee at the hearing of the case on this reference, in the course of his argument urged upon us to ask the Tribunal to refer the third point also to us which was not referred by the Tribunal. We do not think the assessee is entitled at this stage to ask us to direct the Appellate Tribunal to state the case and refer the point to us. In such cases the law provides a remedy to the assessee by an applica tion to be made within six months from the date on which he was served with the notice of refusal by the Tribunal to apply to this Court for the purpose of such reference under section 66 (2) of this Act. No application as required by this section was made before us. We, therefore, are of opinion that there is no ground before us for requiring the Appellate Tribunal to state the case and refer the new point to us.

It was next argued by Mr. Fazlul Haq that the Tribunal was wrong in not including the third question suggested by the assessee in the reference in the questions actually framed by it and that it is a question which does arise out of the reference on the facts stated to this Court and, therefore, this Court ought to answer this question also even without requiring the Appellate Tribunal to make the reference. We are asked to resettle the issue: as it were, and given an opinion on the third question under section 66 (5) which was not referred to us by the Tribunal, as an alternative to the issue of a mandamus to the Tribunal. The scope and nature of the powers to be exercised by the High Court on a reference under section 66 have been considered in a number of decided cases. In the case of Sir Rajendra Narayan v. Commissioner of Income-tax, Bihar and Orissa ((1940) 8 I T R 495 : A I R 1940 P C 158), the Privy Council held that "the function of the High Court in cases referred to it under the section is advisory only, and is confined to considering and answ ering the actual question referred to it" and this was followed in the Full Bench case of the Lahore High Court in Gurmukh Singh v. Commissioner of Income-tax, Lahore ((1944) 12 I T R 393), where it was held: "Unless and until a question is duly referred to the High Court under the provisions of section tr6 the High Court is not competent to raise any question of its own accord." In the case of Commis sioner of Income-tax, Bengal v. Shaw Wallace & Company ((1932) I L R 59 Cal. 1343), it was held that where the question framed by the Commissioner had not been happily worded, the High Court could recast the question in order to make it more precise, but that is entirely different from raising a new question. In view of the above decisions we are unable to comply with the request of the learned Advocate for the assessee to consider the third point which has not been referred to us by the Appellate Tribunal.

We now proceed to deal with the first question which has been referred to us. In this case a notice under section 22 (2) of the Act was served on the assessee. By the said notice a party is required to submit "A return in the prescribed form and verified in the prescribed manner setting forth (along with such other particulars as may be provided for in the notice) his total income and total world income during the previous year." The form of the return has been prescribed by Rules made by the Central Board of Revenue under the power given to it by section 59, subsection (1) of the Income-tax Act, which by its subsection (5) provides that Rules made under this section shall have effect as if enacted to this Act. The form of the return is prescribed by Rule 19 in which directions have been given as to the manner in which the return is to be furnished. In part IV of Rule 19, the direction given is as follows :-

"If the accounts are kept on the mercantile accountancy or book profit system a copy of the Profit and Loss Account and Balance-Sheet must be attached to this return. If the accounts are kept on any other system, the name or description of the system is to be stated, and a copy of any statement which corresponds to the Profit and Loss Account in the merchant the accountancy system must be attached to this return. In the case of a Company a copy of the Auditor's Report, and certificate must also be attached."

In this case it is common ground that the assessee kept his accounts on the mercantile accountancy system and as the return was not accompanied by a statement of the profit and loss account, the Tribunal held that the Income-tax Officer would be justified in making an assessment under section 23 (4) of the Act on the ground that the assessee failed to make the return required by the notice served on him, or, in other words, that the return filed by him was not a return in the eye of the law. We are unable to hold the view that a return to which a profit and loss account is not attached, although the accounts of the assessee are kept on the mercantile accountancy system, can be said to be no return at all in the eye of the law. The very fact that under the Rules something is required under certain conditions to be attached to the return shows that the return is something different from the copy of the profit and loss accounts. There may be a bona fide return in which the assessee has put in his total income to the best of his information and there might yet be an omission due to some cause or other, in which case it cannot be said that .it was no return under subsection (2) of section 22, as was held in the case of Abhey Ram Chunni Lal ((1933) 1 I T R 126). In the present case the very fact that the Income-tax Officer asked the assessee to remove the defect and also issued a notice under section 22 (4) for the production of account books indicates that he wanted to satisfy himself among other things as to the system of accounting that was followed by the assessee before determining whether the return that would be filed was invalid or not. Cases of defective returns and whether, in the eye of law, a particular return was no return at all came in for consideration before various High Courts from time to time. In the case of Commissioner of Income-tax v. A. R. A. N. Chettiar Firm (A I R 1928 Rang. 108), none of the details required under Note 5 on pages 2 and 3 of the form were given and it was held that the return which ignored the provisions of Rule 19, was no return at all. In the case of Commissioner of Income-tax v. Lal Muhammad Sardar Muhammad ((1934) 2 I T R 358), in which the profits or income shown were qualified by the word "about" no period to which the income related was shown, and not all the details required under Note 5 were given, it was held that the Income-tax authority could treat it as no return at all and make an assessment under section 23 (4) of the Act. In the case of Behari Lal Chatterji .v. Commissioner of Income-tax ((1934) 2 I T R 377), a return was made without signa ture or verification and it was held that it was not a proper return and it could be treated as no return by the Income-tax Officer and the assessment made to the best of his judgment. In all these cases the defects were grave and fundamental which amounted to completely ignoring the provisions of Rule 19. To meet cases where the omission or defect is slight and may be due to a bona fide mistake, the Income-tax Act contains several provi sions, namely, the person may be allowed to rectify the mistake or omission under section 22 (3) and he may be called upon under section 23 (2) to attend at the Income-tax Officer's office or to produce or cause to be produced any evidence on which such person may rely in support of such return. He also may take advantage of any notice that may be served on him under section 22 (4) to supply accounts in support of the return. In cases where the return substantially complies with the requirement of Rule 19 but there is some omission as in this case, the Income-tax Officer should issue a notice under section 23 (2) of the Act before rejecting the return as being no return at all. As the Income-tax Officer in this case did not issue a notice under section 23 (2) giving an oppor tunity to the assessee to complete the return, in our opinion, he would not be justified in making the assessment, on the ground that the assessee had failed to make the return under section 23 (4) of the Income-tax Act. Our answer, therefore, to question No. (1) is in the negative.

We now proceed to deal with the second question. Section 22 (4) empowers the Income-tax Officer to serve on any person a notice requiring him to produce such accounts or documents as he may required. The only conditions under which he can issue this notice on a person are either (i) he should have made a return or (ii) a notice should have been served requiring him to furnish a return. In the present case this notice under section 22 (4) was served on the assessee after notice calling for a return was served on him, but before he had filed his return.

It was argued on behalf of the assessee that the Income-tax Officer not having issued a notice under section 23 (2) was not entitled to make an assessment under section 23 (4) for non compliance with the notice under section 22 (4) of the Act. We are unable to accept this proposition. The only two conditions under which the Income-tax Officer can issue a notice under section 22 (a) have been stated above. There is no provision in the Act to justify the view that a notice under section 22 (4), in the case of persons who have filed a return, cannot be served unless the Income-tax Officer first issued a notice under section 23 (2) of the Act. Mr. Radhika Ranjan Guha appearing on behalf of the Commissioner of Income-tax has placed several cases before us which have a bearing on this point and in which it has been held that a notice under section 22 (4) is not dependent on an action to be taken by the Income-tax Officer under section 23 (2). In the case of Messrs Harmukhraj Dulichand ((1928) 32 C W N 710 ), where a combined notice under section 23 (2) and section 22 (4) was served on the assessee and while the notice under section 23 (2) was complied with, there was default in complying with the notice under section 22 (4), it was held that the Taxation Officer was right in making the assessment to the best of his judgment under section 23 (4) of the Act. The difference between section 23 (2) and section 22 (4) was also explained at page 713 in that case as follows :-

"The power under clause (4) of section 22 is a power to the Income-tax Officer which has reference to accounts and docu ments and to no other form of evidence. The right under section 23 (2) is a right to call."

It was also observed in that case that there was no warrant in the statute for saying that after a return is made the power given by section 22 (4) is gone. In the case of R. M. S. R. M. Ramaswami Chettiar v. Commissioner of Income-tax ((1929) I L R 52 Mad. 194), where also a combined notice under section 22 (4) and section 23 (2) was issued and where the notice under section 23 (2) was complied with and there was non-compliance with the one under section 22 (4), assessment under section 23 (4) was held to be justified. It was held in that case that: "Even after an assessee has submitted a return of his income and has complied with the terms of the notice issued to him under section 23 (2) of the Indian Income tax Act (XI of 1922), the Income-tax Officer has power to call for accounts under section 22 (4) and if they are not produced, to make an assessment under section 23 (4) of the Act." The same view was held in the case of Ram Khelawan Ugam Lal v. Commis sioner of Income-tax ((1928) I L R 7 Pat. 852). From all these cases it is clear that a notice under section 22 (4) of the Income-tax Act can be issued on a person either before or after the return has been submitted by him and also along with a notice under section 23 (2), and the fact that the latter has been complied with will not affect the consequence of the default under section 22 (4). Section 22 (4) and section 23 (2) are intended to serve different purposes as indicated in the observation made in the case of Messrs Harmukhrai Dulichand, quoted above.

Section 23 (4) gives the power of summary assessment to the, Income-tax Officer in any one of the following cases; (i) where al person fails to make the return required under section 22 (2) , (ii) where a person fails to comply with all the terms of the notice under section 22 (4) ; and (iii) where a person fails to comply with all the terms of the notice issued under section 23 (2), Each of these is an independent default and justifies the Income-tax Officer to make a summary assessment. In the case of Ram Khelawan Ugam Lal v. Commissioner of Income-tax, referred to above, the notice under section 22 (4) was issued after a return was submitted and it was held to be valid. In the case of R. M. S. R. M. Ramaswami Chettiar v. Commissioner of Income tax, it was argued that aft& the return was submitted the Income tax Officer could not resort to section 22 (4) without issuing a notice under section 23 (2) of the Act and that argument was negatived. In the present case the notice under section 22 (4) was served before the return was submitted and, therefore, there was no occasion on the date when this notice was issued to have resort to section 23 (2) as that section only applies to a case where a return has been made. In the above view of the matter, the answer to the second question is in the affirmative.

The assessee will pay the costs of the reference, hearing fee assessed at Rs. 85.

IBRAHIM. J.-

I agree.

Reference answered accordingly.

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